Is The Bitcoin Legitimate? Or Is The World's First Digital Currency A Risky Investment?

With the first Bitcoin ATM launching in Vancouver on Tuesday, some may question the validity of the digital currency and its efficacy in the modern world. Is this a venture doomed to fail, losing investors thousands if not millions of dollars in the process? Or is Bitcoin an emerging currency free from centralized oversight, high fees and the woes of the current economy?

Launched in 2009, Bitcoin is the world’s “first decentralized digital currency,” according its website, bitcoin.org. The Bitcoin system relies on an algorithm to maintain a steady influx of BTCs created through a process called "mining," hearkening back to 19th century gold rushes and the ’49ers in California, where a few hard (and lucky) prospectors struck it rich. But unlike the miner and his daughter Clementine, people these days mine digitally through specialized hardware and software, working alone or in pools of people decrypting blocks of data for payoffs of 25 BTCs every 10 minutes. And with current prices of around $210 per BTC, that’s a potential of $5,000 (more or less) from each block.

That’s a fair chunk of change for a relatively low input, considering this software runs on a server a user can purchase for as low as $275. The other way to obtain BTCs is through the peer-to-peer markets in which people buy and sell the currency at fluctuating prices that respond to supply and demand. Bitcoins can be spent online or at certain retailers, and has a vendor list that grows daily. With so many vendors, both digital and brick-and-mortar, a rapidly inflating value, and very little input to earn the currency, how could Bitcoin possibly be a bad idea?

It's not as simple as it sounds. Bitcoin is highly volatile in nature as it responds to the market. Since its inception, Bitcoin has gone through several major crashes over the last four years. Most notably, Bitcoin’s value fell 90 percent in 2011, from a high of $30 down to $3. Obviously it bounced back and rose exponentially over the next few years, hitting a high of $260 in April of this year, but only before it crashed again -- this time, it fell 50 percent, a more financially substantial amount, down to $130. This happened in a single day and is highly attributed to a single anonymous Bitcoin and reddit user, known only as Bitcoinbillionaire. Bitcoinbillionaire gave away nearly $13,000 in BTCs to 11 random redditors who confessed that they had no connection to the user before he deposited the funds. His only justification was that he was an early adopter.

Gifting BTCs put an influx of currency that wasn’t on the market and crashed it. Investors who had a large share of BTCs lost a great deal in this crash. It’s the Stock Market crash of 1929 on a much smaller scale. The rapid devaluation of BTCs is tantamount to the rapid stock sale off on Black Tuesday. But unlike the stock market crash, the digital nature of Bitcoin allowed the currency to stabilize in the matter of a week.

But that’s not the whole story, not anymore. Despite the volatility people still adhere to the currency, more companies are jumping on the Bitcoin bandwagon. EVR (pronounced Ever), a lounge in the midtown district of Manhattan, started accepting the currency just before the crash on April 10. Six months later, the company still advertises that they accept the currency. However, Charlie Sherem, co-owner of the lounge, is also the founder of a Bitcoin exchange processor called BitInstant and stands to gain with the inflation of the currency.

The rapid inflation that Sherem may benefit from is troubling. Kristoffer Koch of Norway turned his initial $27 dollar (150 Kroner) investment into close to a million dollars. His secret? He simply forgot about it for four years. Koch purchased 5,000 BTCs in 2009 at half a cent each. If he were to do that today his purchase would cost 1.05 million dollars. This is a prime example of how the currency favors early adopters. But conversely, if he doesn’t act quickly he could lose it all, albeit it wouldn’t be much of a net loss.

Considering the volatility and power/control early adopters have on the market, Bitcoins are probably not a great investment. Moreover, until Bitcoin standardizes and is ubiquitously accepted, the currency actually responds to market pressures more like an asset than a currency. Its value is wholly dependent on whether or not you can sell one on an exchange. If for some unknown reason people stop trading Bitcoins, the value disappears. The Bitcoin needs acceptance before it can truly be a currency. That a US magistrate judge ruled Aug. 13 that Bitcoin is an official currency can only help solidify its legitimacy.

However volatile it may seem, the market has a cap on it that has yet to be reached and could potentially stabilize after that number is reached. Bitcoins are limited to only 21 million produced. After that, the only way to obtain Bitcoins will be through trading on an exchange like Mt. Gox, the most popular exchange site. Currently there are just under 12 million BTCs created, leaving miners a little less than half of total capacity.

Considering the nature of emerging technology, Bitcoin is still in its adolescence. Today’s miners and investors may someday be considered early adopters.